Analysts, Investors Cheer Coke Investment in Monster

Yesterday’s announcement that the Coca-Cola Co. had paid $2.15 billion for a 16.7 percent stake in Monster Beverage Corp. elicited a swarm of analyst reports on the purchase, which most view as immensely positive for both companies.

In a memo, Bonnie Herzog, Managing Director of Beverage, Tobacco & Convenience Store Research, Wells Fargo Securities called the minority acquisition “a huge win for both companies” and gives Coke a way “to quickly gain access to one of the most attractive beverage categories in a capital efficient way.”

Matt Campbell, deals reporter for Europe, Middle East and Africa, Bloomberg echoed Herzog’s opinion, and reported that while Coke has made some strides in the energy drink business, it hasn’t “really been a player.”

“That’s what this deal is about: getting a foothold, but not taking too much of a risk,” Campbell said. “This is still a minority stake, not an outright acquisition.”

Indeed, Coke’s purchase gives it room to gain a deeper understanding and position in the thriving energy drink category while limiting a financial outlay for a total acquisition that would be expected to be worth $12-13 billion. Nevertheless, it’s clear that Coke has some interest in a taking a bigger bite of the Monster pie.

Muhtar Kent, Chairman & CEO, The Coca-Cola Co.

In a media call, Muhtar Kent, Chairman and CEO, Coca-Cola Co. told reporters that the company has an option to increase its stake to 25 percent via open market purchases or through a negotiated transaction with Monster, according to The New York Times. Coke cannot exceed its ownership stake beyond 25 percent over the next four years without Monster’s approval.

“There is always an opportunity on a mutually agreeable negotiated basis to go further,” Sacks said in the call. “What will be will be will be. We are happy running it.”

Although many expect Coke to eventually make a full acquisition of Monster, Ali Dibadj, an analyst at Sanford C. Bernstein & Co. sees the current deal as one that should have happened sooner, according to Bloomberg. Despite regulatory concerns that Monster’s highly caffeinated drinks may be unsafe to consume — an issue that many believe stalled a potential acquisition agreement — Coke might have saved a few dollars by acting earlier.

“Coca-Cola should have taken this move faster,” Dibadj told Bloomberg.

The deal, which includes an ownership transfer of Monster’s non-energy portfolio (which includes Peach Tea, Hubert’s Lemonade and Hansen Natural sodas) to Coke and while the cola giant’s energy drink business, including NOS and Full Throttle will now be in Monster’s hands. Herzog hailed the move as one that will allow Monster to “focus on what it does best — marketing and selling energy drinks to global consumers.”

Plugged into Coke’s massive global distribution network, Herzog believes that Monster’s international business will “significantly accelerate.”

“Given that the majority (about 80%), of [Monster’s] sales are in the United States, Monster is relatively underpenetrated internationally today, with just a 15% share of the global energy category, which is approximately $40B in retail sales,” Herzog wrote, noting that Monster could generate 4-5 times its current international unit case sales by 2017.

Morgan Stanley analyst Dara Mohsenian also sees the deal as having a tremendous upside to Monster’s international growth. He also noted that the swap in non-core portfolios plays very much in Monster’s favor. Monster may be losing its non-energy business, but it gains nearly $2 billion in annual retail sales of Coke-owned energy brands. Mohsenian contrasted the move with Coke’s side of the deal in which it acquires $165 million in wholesale sales of Monster non-energy brands, “with little profit contribution,” he added.

Wall Street also found the transaction quite agreeable. Once news of the blockbuster deal hit the market, Monster’s stock price went through the roof, and while Coke paid approximately $78 a share for its stake in Monster, the financial value of its investment has since surged by nearly a third. At press time, the energy drink giant was trading at almost $93 a share, up roughly 30 percent from the previous day’s close. Coke also saw a bump, albeit a much smaller one, with its share price climbing by over 1.7 percent to nearly $41.

With Monster trading at an all-time high, CEO Rodney Sacks and President Hilton Schlosberg have become overnight billionaires (on paper, at least). Sacks and Schlosberg each own over 18 million shares of Monster worth — at current market value — $1.7 billion.

The investment in Monster is Coke’s second major acquisition stake in a non-traditional beverage company, following its purchase of 10 percent of Keurig Green Mountain for $1.25 billion. Coke later raised its ownership to 16 percent of Keurig, which will collaborate with the cola company on a new line of single-serve beverages for use in Keurig Cold at-home beverage systems.

Kent linked the two investments as part of a pattern in which Coke is taking “a different approach to innovative partnerships.”

“We look at deploying capital in an intelligent and efficient manner to get us a very important footprint in growth categories,” Kent said in the media call.